Saving the UK's financial future - if not us, who?
Robert Gardner says the industry needs to work together to secure the UK's financial future.
How often do we hold up a mirror to ourselves in life? Do we celebrate success as much as we admit failure? Our pensions community recognises excellence in raising industry standards, but do we challenge deep-seated practice or learn from failure?
In the last decade, we can reflect on real advancements in trustee knowledge, implementation of liability-driven investing, and improvements in defined contribution design.
Through this lens we can identify successes, but what happens when we set our achievements in a wider context. What if we consider our success as a measure of the financial security of millions of scheme members and young workers in Britain?
Can we, the pensions industry, claim to have had success when you consider the pensions crisis that is unfolding? A crisis that straddles both our defined benefit (DB) and defined contribution (DC) pension ecosystems.
A seven hundred billion pound pension deficit
The demise of BHS brought to light the severity of the UK's final salary pension problem. BHS's pension deficit isn't unique; it's a symptom of poor decision-making that will have serious consequences for workers and pensioners.
According to Skyval, the total deficit for DB pension funds has reached £710bn on a funding basis. The deficit grew by £100bn on a funding basis in the last two months. These are eye-watering figures and may have a real impact on the financial future of millions of pension fund members.
In 2005, The Pensions Regulator (TPR) set out a recovery plan for the UK's DB pension schemes. At the time, DB schemes were only 84% funded and of obvious concern. Yet a decade later, funding levels have significantly worsened. To make matters worse, in August of this year the Pension Protection Fund (PPF) announced that its index of 5,945 pension funds was now only 77.4% funded.
Interest rates continued to plunge when many pension funds, like BHS, were banking on rising gilts yields. It is, estimated that this has added over 70% in the last decade to pension fund liabilities. How did we, the industry, let this happen? When, at the same time, many funds embraced TPR's new approach, adopted new tools and new ways of thinking to reach full funding?
Young people are not saving enough for their future
What faces the next generation is even more challenging. The Chartered Institute for Securities and Investments estimates if you are 25, you need to save £800 a month over the next 40 years to retire at 65 with an income of £30,000 a year. Now Pensions found that over half 26-35 year olds aren't in a workplace pension scheme and two thirds of 18-25 year olds have not contributed to a scheme.
It is clear young people are not saving enough. We haven't educated them in basic financial literacy; they lack basic saving disciplines, and have unrealistic hopes of having a comfortable income when they stop working. What are we going to do about it? And when? It is time we acted together to stem this endemic problem which will drastically worsen if we fail to act.
Failing to grasp the bigger picture
Our pensions industry is complex, filled with hard-working people dedicated to improving pensions standards. But it can also be insular and adverse to change. The focus on specialisation removes an emphasis on bigger picture thinking and thinking ahead.
The inability to zoom in and out means we focus on the 'means' and not the 'ends'. It is further compounded by hard-wired behaviour and cognitive bias which can muddy objective thinking. The failure to hedge interest rate risk is an example of this and now threatens the financial security of millions of members.
Our pensions industry cannot solve its problems with the same thinking it used when it created them. It's time to do things differently.
We need to prioritise repairing our pension deficits and paying members. We also need to empower the next generation with financial literacy and equip them with the right saving and investment tools to ensure a better financial future.
If we make the pension industry's purpose clear - to ensure the financial security of everyone in the UK - then we have a good chance of working together to deliver this. As John F. Kennedy said, "If not us, who? If not now, when?"
Robert Gardner is co-founder of Redington
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